Background

TimberPro Supply Co. is a regional lumber and building materials distributor serving contractors and construction companies across the Midwest. The company operates 12 distribution yards and maintains relationships with major sawmills and manufacturers. TimberPro has been in business for 30 years and has established strong market positions in its core markets.

The company's revenue is highly sensitive to residential and commercial construction activity, which creates meaningful earnings volatility. Housing starts, renovation activity, and commercial construction projects all directly impact TimberPro's order volume. Additionally, the business experiences seasonal working capital swings driven by construction seasonality—spring and summer are peak building months, while winter sees significantly reduced activity.

Current Situation

TimberPro is currently refinancing its existing credit facilities. The company has agreed to terms with a term loan lender and is now seeking a revolving credit facility to support working capital needs and provide liquidity flexibility through business cycles.

Your firm is considering providing a $50 million revolving credit facility to TimberPro. The senior term loan has already been committed by another lender, so you are evaluating the revolver as a standalone decision.

Capital Structure (Pro Forma)

Pro Forma Leverage: 3.5x Net Debt/EBITDA based on $25 million trailing twelve-month EBITDA

Financial Covenants

The loan is a cov-lite structure; covenant breach should not be considered in the pricing.

Other Liquidity Sources

Cash on Balance Sheet: Beginning cash balances are provided in the historical data. As of Q4 2025, the company had approximately $16 million in cash.

Market Context

Comparable Revolver Pricing:

• Non-cyclical B/B+ rated borrowers at similar leverage levels: SOFR + 350-400 bps
• Cyclical BB- rated borrowers at similar leverage levels: SOFR + 425-475 bps

Current Rate Environment:

• 5-year Treasury: 4.20%
• SOFR (current): 4.50%
• Market expectation is for rates to remain relatively stable over the next 12-18 months

Your Firm's Return Requirements

Given Credit Parameters

To focus your analysis, the following credit assumption is provided:

Collateral Value in Liquidation: $110 million

This represents the estimated orderly liquidation value of TimberPro's assets (inventory, receivables, equipment, and real estate) that serve as collateral for the credit facilities. This collateral secures both the $87.5mm term loan and your $50mm revolver on a pari passu (equal priority) basis.

Risk Assessment Framework

Your credit analysis should consider the following three categories of risk when determining appropriate spread:

1. Cyclical/Beta Risk

Exposure to systematic economic risk driven by the construction cycle. Consider:

• Correlation between company performance and residential/commercial construction activity
• Sensitivity to interest rate cycles (affecting housing starts)
• Regional vs. national economic exposure
• Historical volatility during recession periods (note the 2024 downturn in the data)

2. Firm-Specific Risk

Company-specific factors independent of broader economic cycles. Consider:

• EBITDA margin stability across revenue environments
• Business model durability and competitive position

3. Recovery/Loss Risk

Structural and recovery considerations given the $110mm collateral value. Consider:

• Senior secured position (pari passu with term loan)
• $110mm total collateral value shared with $87.5mm term loan
• Collateral coverage: 80% of total committed facilities ($110mm / $137.5mm)
• Revolver-specific considerations:
  • Exposure at default varies with utilization
  • Adverse selection risk (likely drawn during stress = higher exposure)
  • Cross-default scenarios (may not be fully drawn = lower exposure = potentially better recovery)